The US secretary of state, Hillary Clinton, joined a wave of condemnation of Israel's approval of the construction of 1,100 homes in an East Jerusalem settlement on Tuesday, which puts at risk international efforts to persuade Israeli and Palestinian negotiators to return to talks.

The move was "counter-productive to our efforts to resume direct negotiations between the parties", Clinton said. "As you know, we have long urged both sides to avoid any kind of action which could undermine trust, including, and perhaps most particularly, in Jerusalem, any action that could be viewed as provocative by either side."

Lady Ashton, the EU's foreign policy chief, called for the plan to be reversed, saying settlement expansion "threatens the viability of an agreed two-state solution".

The expansion of Gilo, a settlement built across the Green Line, was authorised by a Jerusalem planning committee and would be subject to public consultation before final approval.

The Palestinian negotiator Saeb Erekat called the move a "slap in the face to all international efforts to protect the fading prospects of peace in the region". Referring to criticism of its "unilateral" act in seeking recognition of its state, the Palestinian Authority (PA) said "there could be nothing more unilateral than a huge, new round of settlement building on Palestinian land".

Following the PA's submission of its request to be admitted to the UN as a full member state, the Middle East Quartet – the US, UN, Russia and the EU – called for both parties to return to the negotiating table. In a statement setting out a timetable for talks, the quartet urged the parties "to refrain from provocative actions", which was interpreted as a coded call for Israel to hold back from settlement expansion. Neither party has formally responded to the quartet's statement, but the Palestinians have made clear they want a further settlement freeze before more talks.

The UN announced it was concerned about the decision to build further in Gilo. "Today's decision … ignores the quartet's appeal of last Friday to the parties to refrain from provocative actions," said a spokesman for Robert Serry, the UN special co-ordinator for the Middle East peace process. "This sends the wrong signal at this sensitive time. Settlement activity is contrary to the road map and to international law, and undermines the prospect of resuming negotiations and reaching a two-state solution to the conflict."

The expansion of Gilo, a huge settlement built on land between Jerusalem and Bethlehem that was captured by Israel in 1967 and later annexed, has been on the table for more than two years. The settlement is illegal under international law. The Israeli government asserts it has the right to build Jewish settlements anywhere in the city.

The approval came as the chairmen of several rightwing parties in Israel wrote to Netanyahu to urge him to annex all West Bank settlements and accelerate settlement construction in response to the Palestinian bid for statehood. They also called for financial sanctions and curbs on Palestinian construction in areas of the West Bank controlled by Israel.

Tensions in the West Bank between settlers and Palestinians have risen sharply this September with the demand for Palestinian statehood at the UN.

An Israeli police investigation concluded that a settler and his infant son, who were killed when their car overturned last Friday, had been struck by a rock thrown by Palestinians. At their funeral on Sunday night, a rabbi called for "collective punishment" of Palestinians, saying "there are no innocents in a war".

The Israeli security service, Shin Bet, confirmed it had urged the education ministry to halt funding to a religious school in the settlement of Yitzhar. According to a report in the news service Haaretz, security services said senior rabbis were inciting students to attack Palestinian villagers.

A Palestinian man was shot dead by Israeli soldiers during a protest last Friday against settlers in the West Bank village of Qusra.